Despite Ikea's involvement in the development of modern flatpack housing, you won't need an Allen key for assembly; you won't even have to put it together yourself. After the Swedish company experimented with a prefab village in Gateshead five years ago, one of Britain's biggest housebuilding companies, Persimmon, is investing heavily in prefabricated housing.

Understandably, Persimmon doesn't like the term prefab because it conjures up images of low-quality postwar buildings destined to be knocked down in a few years' time. The company prefers to talk about "second-generation closed-panel timber-frame" housing.

The York-based housebuilder acquired the Space4 timber frame factory at Castle Bromwich, near Birmingham, as part of its takeover of a smaller rival, Westbury, in 2006. The factory sold more than 3,250 timber-frame home kits last year, a 19% rise on the previous year, supplying just over a third of Persimmon's homes.

Despite a lack of mortgage finance, demand for newbuild homes is holding steady, thanks to the government's First Buy and Funding for Lending schemes, rival housebuilders Taylor Wimpey, Redrow and Bovis Homes say.

You can't tell a Space4 timber kit house from a bricks-and-mortar one, because Persimmon adds cladding to make them look like traditional homes, under its Charles Church and Westbury brands. The company reckons it will build 3,500 this year. It has been making three-storey houses, student digs and apartment blocks in this way, including 63 social housing units in Liverpool.

Persimmon isn't the only company building prefabricated houses. Ikea built Britain's first flatpack hamlet in the form of St James Village, Gateshead, in 2007, together with the building firm Live Smart @ Home. The 93 Scandinavian-style BoKlok homes, a mix of one- and two-bedroom flats and two- and three-bedroom houses, were aimed at young professionals and families (households earning between £15,000 and £35,00 a year). Priced at between £99,500 and £149,500 and sold on a shared ownership or outright sale basis, they were snapped up quickly.

BoKlok (BoKlok is Swedish for "smart living") is a joint venture between Ikea and the Swedish construction giant Skanska. Ikea says that while it has no imminent plans for more prefab housing projects in Britain, Skanska will build any future villages.

"The UK is an interesting market for us," says Ewa Magnusson, marketing manager at BoKlok. "We're considering it. If we re-enter, we would do it with Skanska."

Ikea also approached Space4 about teaming up but no deal was reached.

The idea that these are flimsy, flatpack houses is given short shrift. BoKlok points out that they are soundproofed, with high ceilings, low energy heating and insulation, and come with an eco-homes "excellent" rating.

Not surprisingly, the open-plan interiors look a bit like an Ikea catalogue. They come with laminate flooring and Ikea kitchens, and each buyer was given a £250 voucher and a free consultation with an Ikea interior designer.

While BoKlok houses have a limited choice of colour and cladding types, Persimmon's Space4 arm has come up with more than 1,000 different CAD-designed timber-frame house types. Chris Hagan, managing director of the factory, says: "If you chopped them into smaller pieces, you could sell them to B&Q." But he adds that this is unlikely, as the company is after high volume sales.

The advantage of making a fully insulated house shell in a factory is clear: it takes a day or two to assemble and a further six to eight weeks to fully kit it out, plumb and wire it – the windows and doors as well as the interiors are fitted on site – while a traditional home takes 14 to 16 weeks to build. And builders are less reliant on good weather.

The Space4 factory is modelled on the car industry. The Midlands has traditionally been an automotive hub, and the majority of the Space4 workers previously worked for carmakers such as Land Rover, Rover or Peugeot. Hagan himself used to work in the car industry, and brought a similar shift operation and level of automation to the housing factory to sharpen up the process.

It takes just an hour to manufacture a house, with external and internal wall panels and floors being produced on three different production lines simultaneously. The factory has capacity to manufacture more than 8,000 houses a year, so production could easily be ramped up in response to rising demand.

With the government's drive towards zero-carbon housing by 2016, the environmental credentials of a "fabric first" approach are key (in contrast to a traditional house, to which solar panels, wind turbines and air source heat pumps are added later). Persimmon says a Space4 home is 50% more energy efficient than a traditional house, and cosier to live in. Improved insulation and air tightness mean that the average heating bill is £360 a year, compared with £720 for existing homes.

It's mainly down to the pink phenolic foam insulation that is injected into the timber-house frame and combined with a thin membrane, while wood is a good natural insulator in itself. Phenolic foam is also fire resistant. It will not spread the flames, and it gives out only minimal toxic fumes.

With new environmental regulations kicking in next year, other housebuilders are also working to make their houses greener.

Other countries, such as Germany, build predominantly in timber. Timber frames account for 70% of all new houses built around the world, but just 25% of new housing in the UK.

Nigel Greenaway, who heads Persimmon's southern division, says his son, who lives in a two-bedroom Space4 house in Devon, pays just £1 a day for heating and electricity, and has tiny radiators. At a time of surging energy bills, this is certainly very appealing.

"We believe we've got a real steal on the competition," he says.

Other UK housebuilders have looked at making timber-frame homes but decided it wasn't for them. Barratt, which was once Britain's largest housebuilder, abandoned timber-framed construction after suffering some bad press in the early 1980s that led to sales halving. Space4 supplied other housebuilders including Bellway, Taylor Wimpey and David Wilson in the past, but now supplies only Persimmon. Taylor Wimpey's own timber-frame division, Prestoplan, is a small part of its business.

Meanwhile, a growing number of German timber frame companies such as Huf Haus and Baufritz have come to Britain. The family-run Huf Haus, which celebrated its 100th anniversary this year, has built about 180 prefab houses in the UK since coming here 11 years ago. Prices start at £450,000.

David Ritchie, chief executive of Bovis Homes, believes that a traditionally built "brick and block" home remains the preference of many British homebuyers. "The often quoted benefits of constructing more quickly using other build techniques such as timber frame rely very much on the kit of parts being correct when it arrives on site," he says. "And when this doesn't happen, it can lead to significant downtime and delays."

He adds that the company regularly builds its show homes on new sites in under 42 days, so speed of build is not a problem. "More importantly, in the current market, where build times are dictated by the availability of a customer with a mortgage, there is no real benefit to racing off down the field," he says.

While countries such as Germany have a long tradition of building in timber, Greenaway acknowledges there are challenges in persuading customers to switch from traditional brick homes to timber-frame houses. "It's different here: for probably 100 years, we've been building in bricks," he says. "But when asked: 'Would you like to slice 50% off your fuel bills?' most people would like to do that."